Morningstar DBRS Confirms Credit Ratings on All Classes of SFAVE Commercial Mortgage Securities Trust 2015-5AVE

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-5AVE issued by SFAVE Commercial Mortgage Securities Trust 2015-5AVE as follows:

-- Class A-1 at AAA (sf)
-- Class A-2A at AAA (sf)
-- Class A-2B at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)

All trends are Stable. The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS’ expectations since the last review, evidenced by the steady financial performance as of YE2023.

The transaction consists of a $1.25 billion fixed-rate loan that is interest only (IO) for the 20-year term. The loan is secured by the borrower’s interest in the condominium unit and related interests in the land and improvements that comprise the 12-story, 655,238-square-foot (sf) Saks on Fifth retail building in New York. The building has served as the flagship store for the Saks Fifth Avenue brand (Saks) since 1924 and has been a mainstay in the heart of Manhattan for more than 90 years. The property is owned and occupied by affiliates of the Hudson’s Bay Company (HBC; the sponsor), which owns the Saks brand. The sponsor bifurcated the land and improvements as part of this refinancing transaction. The sponsor owns the fee interest on the land and executed an absolute triple net 99-year lease to the retail building owner, 12 East 49th Street LLC, which is also the ground lessee. At issuance, the building owner (ground lessee) paid the borrower annual rent of $62.5 million, which increases annually by the greater of 3.25% or CPI. According to the October 2023 rent roll, the annual rent amounted to $93.2 million. The ground lessee pays all expenses related to the land and building, then leases the building to Saks.

The building is 100% occupied by Saks under an initial 30-year operating lease with 12 East 49th Street LLC, expiring in December 2044. At issuance, Saks paid an annual amount of $160.0 million with an abatement of up to $20.0 million for capital improvements. The annual payment under the operating lease is subject to rent steps of 3.25% per year. The operating lease is not collateral for the loan, and the lender is not obligated to recognize it in the event of a mortgage foreclosure.

According to the YE2023 financial reporting, the collateral reported a net cash flow (NCF) of $87.3 million, with a debt service coverage ratio of 1.57 times (x), which is above the YE2022 figures of $75.9 million and 1.36x, respectively.

The property has benefited from recent capital improvement projects that included a 40,000-sf men’s floor featuring 23 new brands added to the space, according to an article published by the Robb Report in January 2023. Furthermore, Saks has reportedly placed a bid for one of New York’s three available licenses that would allow the luxury department store to build and operate a full-scale casino totaling 200,000 sf on the top three floors of the store. However, media sources indicate that a decision will not be made for some time. Apart from these recent developments, HBC previously converted some of the Saks space into coworking space, known as SaksWorks. In general, Morningstar DBRS views these events as a positive development for HBC and the subject transaction overall, as they display HBC’s willingness to pivot and invest in strategies that will make the most of its commercial real estate portfolio.

Morningstar DBRS’ NCF of $91.0 million represents a look-through approach for the building, assuming it is being used for a mix of retail and office space. Using a capitalization rate of 6.75%, reflecting the subject’s location and quality, the resulting Morningstar DBRS value was $1.3 billion, a variance of -63.6% from the appraised value of $3.7 billion at issuance. At issuance, the appraiser valued the ground lease at $2.1 billion. The Morningstar DBRS value implies a loan-to-value ratio (LTV) of 92.7% compared with the LTV of 33.8% on the appraised value at issuance.

Morningstar DBRS maintained positive qualitative adjustments to the final LTV sizing benchmarks, totaling 5.5% to account for lease structure; recent renovations and high-quality finishes at the property; and strong market fundamentals, particularly for retail leasing. Morningstar DBRS also made negative adjustments to account for the subject’s high total secured debt LTV.

Morningstar DBRS’ credit ratings on Classes A-1, A-2B, B, C, and D vary by three or more notches from the results implied by the LTV Sizing Benchmarks on a look-through basis. The variances are warranted considering that the value Morningstar DBRS used for its analysis results in a 63.6% haircut to the issuance appraised value, the property has a prime location, and the escalating ground rent sufficiently covers the debt service obligations.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Class X-A is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Other methodologies referenced in this transaction are listed at the end of this press release.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261
-- North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].